Greece’s Big Challenge to Fix Bad Loans Without Destroying Banks

The big challenge for Greece’s Prime Minister Alexis Tsipras is to fix the bad loans situation without destroying Greek banks, according to a New York Times report.

The nonperforming loans issue is so thorny that the Greek government did not include it in the current bundle of reforms tabled in parliament this week and was postponed.

More than 40 percent of loans issued by Greek banks are seriously in arrears. By some estimates, the rate is more than 50 percent, if loans that are not serviced in recent months are included. That is one of the highest rates in the world, and it has so weakened the Greek banking system that it raises doubts about the country’s ability to mount an economic recovery, the NYT report says.

A big challenge for the Greek government is how to address the bad loan problem in a way that offers some hope to debtors, yet does not destroy the banking system.

The European Central Bank will complete an assessment of the health of Greek banks by the end of October, then come up with a recovery plan in collaboration with the Greek State. Representatives of the largest Greek banks were in Frankfurt this week to discuss the problem with central bank officials.

The latest financial aid package for Greece includes up to 25 billion euros to recapitalize Greek banks. However, bad loans are not only a symptom of recession but also a cause of further economic ills, tying up money that might otherwise be lent to healthier companies.

In Greece, about 40 percent of the bad loans are too small — a one-person businesses or midsize businesses such as fish farms or ferry operators. Those smaller and midsize businesses are a critical source of jobs in Greece, which has relatively few large corporations.

“A high level of nonperforming loans means a lot of resources are trapped in unproductive parts of the economy,” stated the New York Times Platon Monokroussos, deputy general manager of Eurobank Ergasias, one of Greece’s four biggest banks.

Fears that banks would go bust from bad loans were a main reason that Greeks drained their accounts. Depositors withdrew 40 billion euros from December to July, forcing the government to impose capital controls.

The restrictions crimped consumer spending, further slowing the economy and leading to more bad loans. The task ahead for bankers and bank regulators is to break the vicious circle. But doing so will be extremely difficult, the report says.

Under pressure from creditors, Greece’s Parliament has already passed laws that will give Greek banks more power to seize property and a speedier legal process for claims. Those changes might spur debtors who might have the money to pay their loans but don’t bother because it has been so difficult for banks to foreclose.

Bank officials say they will use the increased powers to work out payment plans with debtors and they are not interested in seizing property in a depressed real estate market.

The European Central Bank, which supervises Greek banks and has been keeping them alive with emergency loans, has begun poring through loan portfolios to determine just how bad the damage is. That is the first step in determining how much capital banks need to remain viable. The process is a delicate one. The bank cleanup must be tough enough to be credible.

“Nonperforming loans have to be dealt with in order to restore confidence in banks,” as well as to reduce the burden on households and businesses, said Anthimos Thomopoulos, chief executive of Piraeus Bank, another big Greek lender.

“The nonperforming loan problem is mostly due to the recession,” Yannis Stournaras, the governor of the Bank of Greece, the country’s central bank, said in an interview. With a cooperative effort by central banks, regulators and the commercial banks, he said, “it is a manageable problem.”